Welcome to AB 220 Global Business Unit 7 Global Trade and Production Bill Okrepkie AIM - WSOkrepkie (605) 342-1689.

Welcome to AB 220Global Business

Unit 7 Global Trade and Production

Bill [email protected]@wi.rr.comAIM - WSOkrepkie(605) 342-1689 (h)(605) 390-0466 ©

Agenda

• Welcome everyone• Admin • Review Unit 6• Discuss Unit 7• Conclusion of Seminar

Hi everyone and I hope you all are having a great week and weekend!

Are there any questions so far in the class or any questions I missed?

AB220 Unit 6 ObjectivesDuring this unit, we will:

• Explain the concept of strategy• Understand how pressures for cost reductions and

pressures for local responsiveness influence strategic choice

• Identify the different strategies for competing globally and their pros and cons

• Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter, and on what scale

What is Strategy?

Hill (2011) Defines Strategy as: “ Actions managers take to attain the firm’s goals” (p. 381).

The Goal for Strategy in Business:Profitability!

•ROIC – Rate of Return on Invested Capital: One consistent measure of profitability. Calculated by dividing net profits by total invested capital.

•Profit Growth – Percentage increase of net profits over time.

Only 2 Ways to Increase Profitability!

Two Broad Strategies:1.Strategies that lower costs;

2.Strategies that create value to support higher prices.

Value Creation:What is value?

In a free market, price does not capture all of the value because of competition. Typically, the customer pays less than their perceived value of something because of competition.

Value Creation: ContinuedHow then can we capture more of this value in price for our goods or services? ( Receive a higher price)

By Differentiation!

Differentiation is about creating the perception in your customer that your product or service is different from those of the competition and worth a higher price.

Strategic Positioning Michael Porter: Asserts that “superior profitability” is gained by firms that achieve a greater “gap” between value and cost of production than their competitors.

Implicit in this is the demand that businesses choose between these “value creation” and “low cost” strategic approaches and then configure their operations around that specific strategic approach.

Strategic Positioning Continued Examples of such positioning:

Four Seasons – Luxury Hotels and ResortsStarwood (Sheraton and Westin) and Marriott – Mid-priced Hotels and Resorts.

Three Basic Rules of Strategic Positioning

1.Choose a strategic position on the “efficiency frontier” where there is enough demand for the firm’s products or services;

2. Configure all internal operations ( such as HR, IT, manufacturing, marketing, etc.) to support the specific choice;

3. Ensure that the firm has the right organizational structure to support the strategy.

Operations as a Value Chain

• Primary Activities: Research and Development, production, marketing and sales and customer service.

• Support Activities: Information Systems, logistics, human resources, infrastructure (internal controls, corporate culture, etc.), management.

The Role of Organization in the Execution of Strategy:

There must be a good fit of organization to the strategy:Organizational Structure – The physical division of the organization into sub units; location of decision-making; integrating components (teams, groups, etc.).

Controls – Metrics that measure and report on performance.

Processes – How decisions are made and work is done.

Organizational Culture – The internal values shared by those in the organization.

People – The specific strategies used to select, hire, train, promote, and retain the kind of people that the organization desires.

How Businesses Grow Globally:• Leveraging Core Competencies – Taking something

your business does better than others and leveraging this competency in new markets.

oExample: Toyota in the U.S. Wal-Mart in China

• Using Location Economies – Performing work where it can best be done. (Lower cost or differentiation from competitors)

oExample: Electronics manufacturing in China, Perfume from France, Italian handbags and shoes.)

How Businesses Grow Globally: Continued

• Leveraging Experience Effects – The idea that the more that something is produced by a firm, the lower the costs to produce it. Two reasons:

1.Learning Effects – Efficiencies (cost savings) gained by doing something repeatedly.

2.Economies of Scale – Per unit cost savings gained by producing a large volume of a product.

Cost Pressures Versus Local Responsiveness:

Global Businesses Typically Face Two Types of Competitive Pressures:

•Pressures for cost reductions: Pressures to standardize a product or service across many different markets to achieve cost savings.oExample: IKEA

•Pressures to be locally responsive: Pressures to differentiate products, services, marketing strategy to accommodate local tastes, preferences, laws, customs, etc.

Choosing a Strategy:Global Standardization Strategy – Emphasizes profitability by gaining cost reductions. A low-cost strategy.

Localization Strategy – Emphasizes profitability by customizing products or services to suit tastes and preferences across different markets.

Transnational Strategy – Attempts to balance the use a global standardization strategy in markets where this is supported and the use of a localization strategy where this is required.

International Strategy – Attempts to take products produced domestically and sell these in foreign markets with little customization.

Basic Entry Decisions•Which Market to Enter – Choosing growth potential and acceptable political, legal and cultural risk within a particular market.

•When to Enter the Particular Market – First-mover advantages versus first-mover disadvantages (pioneer costs).

•On What Scale to Enter – The costs and benefits of entering a foreign market rapidly on a significant scale versus smaller-scale entry.

Entry Modes• Exporting – Making a product from a firm’s home country and selling it directly

overseas.

o Advantages: Avoids substantial costs of other entry options Can help business gain location economies

o Disadvantages: May not be the most cost effective High transportation costs Possible restrictions and tariffs

Entry Modes• Turnkey Projects – Have a contractor complete a foreign project and then

“receive the key.”

• Advantages: Useful when FDI is limited by governmental regulations Can be less-risky than conventional FDI

• Disadvantages: No long-term interest in country Can inadvertently create competition Can sell competitive technology

Entry Modes• Licensing – Granting rights to the licensee to use intangible property for a

royalty fee for a specific length of time. • Advantages:

Shifts start-up capital requirements to the licensee. Can be useful when regulations would otherwise prevent direct entry into

a country’s markets. Can be useful when firm possesses some intangible property and does

not want to develop it themselves. • Disadvantages: Firm granting license does not gain experience curve or location

economies. Limits the ability to strategically coordinate activities across national

boundaries. Possible loss of technological know-how.

Entry Modes

• Franchising – Granting rights to the franchisee to use intangible property for a royalty fee for a specific length of time and forces franchisee to follow franchisor’s rules.

• Advantages: Shifts start-up capital requirements to the franchisee. Can be useful when regulations would otherwise prevent direct entry into

a country’s markets.

• Disadvantages: Can pose quality control issues. Can prevent franchisor from leveraging profits in one country for use in

another.

Entry Modes

• Joint Ventures – Establishing a firm owned by two or more independent firms. This has been a popular entry mode.

• Advantages: Can gain from partner’s host-country knowledge. Permits risk sharing among partners. Can be useful when regulations would otherwise prevent direct entry into

a country’s markets.

• Disadvantages: Can risk loss of technology to partner. Can prevent partner from having tight control of subsidiaries. Can lead to conflicts and disagreements among partners.

Entry Modes

• Wholly Owned Subsidiaries – Owning a foreign business outright either through acquisition or greenfield ventures.

• Advantages: Provides complete control for firm and protects technology. Permits tight control across different countries. May be necessary to gain experience curves and location economies. Gives firm all profits generated in the foreign market.

• Disadvantages: Usually the most costly entry mode containing the greatest risks. Risks can be reduced through acquisitions.

Any Questions?

Unit 6 Work: • Readings: pp. 381-407 Chapter 11 & pp. 418-438 Chapter 12 Hill Text.

• Class Discussion: Read the Zip-6 Discussion Scenario and pages 382-385 and discuss Zip-6 possible strategies.

• Drop box Assignment: Read the Zip-6 Discussion Scenario and explain

the advantages and disadvantages of different entry options for Zip-6 into the Turkish market.

• Journal Activity: Read the brief scenario on pages 417-418 about GM in China and record your impressions.

• Seminar

• Complete Unit 6 Quiz

Any Questions or Comments ?

• Export Import Bank• Small Business Administration in U.S. • World Bank• World Trade Organization

A Few Resources:

Let’s Drill down a bit

• State’s advantage to help and support businesses• Tax increases from new businesses• More people employed• Good for the politicians• Good to meet the state economic development people• Good to meet your local economic development people

Win-Win for everyone

http://www.constructionweblinks.com/Organizations/International__Organizations/export_agencies.html#S

International: State Export and International Trade Agencies

Back toInternational

U.S. Government Agencies that Provide Export, International Trade Assistance

A C D F G H I K L M N O P R S T U V W  AAlabama Development Officewww.ado.state.al.usInternational Trade contains Resource Guide to trade support services, exporters directory, export statistics.Alaska Industrial Development and Export Authoritywww.aidea.orgPrograms provides overview of the business and export assistance loan guarantee.

Government Agencies

South Dakota International Business Institutewww.sd-exports.org

Supports the Office of Economic Development in facilitating international trade. International Trade Directory lists exporters and service providers by company or product. Offers free business consultations; seminars; information about free trade zone; international trade statistics; international credit reports for a fee.

South Dakota

South Dakota International Trade DirectoryIdentifies South Dakota exporters and productsSouth Dakota International Trade Statistics - 2009Export statistics drawn from WISER-Census data2011 International Business Seminars/Workshops

Keep your knowledge of international business topics, issues and regulations up to date  by attending our seminars and workshops.

South Dakota Foreign Trade ZoneLocated in Sioux Falls, SDCoface International Credit ReportsInternational credit reportsInternational Events CalendarTrade shows, trade missions, & international conferences

           Additional Resources   U.S.D.O.C. - Export Portal A concise guide to expanding your business through export sales. U.S.D.O.C. - Commercial ServiceWeb powered broadcast series aimed at increasing U.S. exports and opportunities for small- to medium- sized businesses. U.S. Department of State - Travel Advisories  Before traveling abroad, check with the State Department for advisories and warnings. Major Web Links to Get You Started Trade Leads on the Internet Frequently Asked Export Q & A

South Dakota Export Agencies South Dakota Contact Us Sioux Falls Phone: 605-330-4265

Fax: 605-330-4266Email: [email protected] Falls U.S. Export Assistance Center2001 S. Summit AveAugustana College / Madsen CenterSioux Falls, SD 57197www.buyusa.gov/southdakota Sioux Falls Staff

Cinnamon King, USEAC Director Phone: 605/330-4265 or 4264

Fax: 605/330-4266Email: [email protected]

Industries: Agricultural Machinery & Eq., Construction Eq.

How do you find this stuff

Any Questions

Unit 7

Global Trade and Production

AB220 Unit 7 ObjectivesDuring this unit, we will:• Explain the promises and risks associated with

exporting.• Identify the steps managers can take to improve their

firm’s export performance. • Identify information sources and government programs

that exist to help exporters.• Recognize the basic steps involved in export financing. • Describe how countertrade can be used to facilitate

exporting. • Explain why production and logistics decisions are of

central importance to many multinational businesses.

Exporting: The Promise!

• Large revenue and profits exist in foreign markets• Exporting is a relatively easy way to increase business• Enables firms to achieve economies of scale and

lower per unit costs• Large firms tend to be proactive with exporting while

small businesses tend to be reactive.

Question: How could exporting allow a firm to lower per unit costs?

The Pitfalls of Exporting:Inexperience often leads to initial exporting mistakes.

•Common Pitfalls:-Poor market analysis-Poor understanding of competitive conditions abroad-Failure to customize products for different country-Lack of effective distribution programs-Lack of effective promotional programs-Lack of financing-Underestimation of time, resources, and expertise required

Question: How many of these are due to lack of knowledge?

Improving Export Performance:

Three Broad Strategies:

1.Improving knowledge;

2.Seeking outside help;

3.Developing an export Strategy.

Improving Knowledge: Collecting Information:• U.S. Department of Commerce (Two Resources)

-International Trade Administration – Enforces U. S. Trade laws and works to ensure fair trade as well as promotes U.S. Trade.

-Foreign Commercial Service – Has offices in 80 embassies and collects export intelligence and promotes trade.

- Small Business Administration -Employs 76 district international trade officers, 10 regional trade officers, and 10-person international trade staff in Washington. -SCORE – Has 850 volunteers with international trade experience to provide one-on-one counseling for small businesses.

-State Trade Commissions - Most states and larger cities maintain these resources

Seeking Outside Help: EMC’sExport Management Companies:

•Function like an export department for small to mid-sized firms- Temporary Service- Permanent Service

•Some EMC’s specialize by product or industry

•Good EMC’s have a network of overseas contacts

Question: Why would an EMC be useful when first exporting?

Developing an Export Strategy: 1. Hire an EMC or an experienced member of staff to identify opportunities, handle paperwork and regulations; 2. Focus on a specific market or markets and gain competency in this limited market before venturing to others; 3. Enter on a small scale to learn and reduce costs;4. Hire the necessary personnel devoted to exporting.5. Be willing to take the necessary time to build the necessary relationships required of the country involved.6. Hire local personnel to help get established in a foreign market.7. Be proactive about reaching another market.8. Be willing to consider transfer production to the foreign market when it is cost-efficient. Question: Why do you believe 8 would be necessary?

Export and Import Financing: Key Factor: Lack of Trust:•Trusting someone you have never met•Doing business in a different place with different laws

Several Tools:•Letter of Credit – Issued by bank guaranteeing payment under specific conditions.•Draft – Order instructing one’s agent to pay specified amount at specified time.•Bill of Lading – Multi-purpose document issued by common carrier to exporter. Serves as contract, receipt, and title to goods.

U. S. Export Financial Assistance:

1.Export-Import Bank:o Independent U.S. government agencyo Provides financing for imports, exports, and exchanges for both

U.S. businesses seeking to export and loans to foreign businesses seeking to import from U.S. companies.

2. Foreign Credit Insurance Association:oProvides insurance against commercial and political risksoCovers the exporter in lieu of a letter of credit

Question: Have you ever heard of either of these government organizations?

Countertrade:• Direct trading of goods or services for other goods or

services. • Covers a wide range of agreements• Types:

o Barter – Direct trade without cash between two partieso Counterpurchase – Agreement to reciprocate in purchasingo Offset – Counterpurchase with the option for one party to fulfill

their part by trading with another party in that same countryo Buybacks – When a firm develops a business within another

country and agrees to receive payment in the form of a percentage of output

Question: How could countertrade be useful to U.S. businesses?

Global Production:• Includes both goods and services• Includes the outsourcing of some portion of a firm’s goods or services• Includes emphasis on quality controls to lower costs and increase value:

o Total Quality Management – (Deming, et al.) First adopted by Japanese firms, then American firms. Seeks to eliminate mistakes and defects in manufacturing.

o Six Sigma – Direct descendent of TQM (Motorola and Allied Signal) Uses statistically-based control sequences to reduce or eliminate defects and errors in products.

Where to Produce? • Country Factors:

o Choosing favorable economic, political, and cultural conditions;

o Choosing acceptable “externalities” (skilled labor availability, supporting industries, etc.)

o Choosing favorable formal and informal trade barriers

o Choosing favorable future estimates of the country’s exchange rates

Question: Why would future exchange rates be important in our choice?

Where to Produce? (Continued) • Technological Factors:

o Level of Fixed Costs – A relatively low level of fixed costs encourages multiple production locations while relatively high costs discourages it.

oMinimum Efficient Scale – Refers to the point of production at which a plant no longer gains scale economies. This must be considered within the context of demand.

oFlexible Manufacturing Technologies: o Reduce set up timeso Provides better machine utilizationo Provides better quality control

Question: Can you list an example of flexible manufacturing?

Where to Produce? (Continued)

• Product Factors:

o Value to Weight Ratio – Determine transportation costs

oUniversality of Need – The degree to which a product can be standardized across different countries

Question: Can you list an example of Value to Weight Ratio being important?

Question: Can you list an example of Universality of Need being important?

Any Questions?

Unit 7 Work: • Readings: pp. 444-462 Chapter 13 & pp. 469-479 Chapter 14 Hill Text.

• Class Discussion: Read the Zip-6 Discussion Scenario about Bolivia and Peru and discuss the 3 questions.

• Drop box Assignment: Read the Zip-6 scenario about South Korea and

respond to the three assignment points.

• Journal Activity: Visit the U.S. Energy Information Administration website, read the assigned articles and journal your thoughts.

• Seminar

Any Questions or Comments ?

It looks like the hour is up. I hope this session was valuable to you and I look forward to seeing you in our next seminar. Have a great week and weekend and see you next week and in the discussion board.